Nestle: Lack of product innovation hurts volumes
Shies away from select categories and channels to combat rising costs
Over the last 18 months, consumer companies have been the refuge of equity investors, as most other sectors have been severely hit by slowing growth and inflation. Consumption has held on for most of this time, but is now beginning to show signs of a slowdown. So, unlike in the past, all consumer companies will not do well, especially those which have not taken the right steps to improve their product portfolio and expand distribution. Nestle has not only not done these things, but has done the reverse. Unlike some of its peers, Nestle has undertaken channel and product rationalisation over the last year, which has adversely impacted its sales.
Analysts say the slowdown in foods has been more pronounced than in the home and personal care segment. The reason behind this is high food inflation and slower product innovation as a result of that. In the face of rising input prices (milk, wheat and sugar), most companies did not innovate. Nestle is a classic example of this strategy. The company stopped milk supplies to the armed forces, discontinued low margin toffees (Eclairs) and lowered grammage as input prices shot up. In the third quarter of calendar 2012, the company’s net sales grew eight per cent, significantly below the market’s expectations of 16 per cent. And, most of this growth was value-led and not volume-led. All these have resulted in Nestle’s volume growth coming off since the fourth quarter of calendar year 2011.
The worst criticism is that it has not come up with any new product innovations and only made marginal changes to older products. Given that packaged food is about one-time usage, analysts say the consumers’ wallet share has been captured by the personal care segment where the product can be used multiple times.
Analysts say under-investment in distribution, categories and products has affected the company’s performance. The only saving grace will be last year’s low base. Motilal Oswal Securities expects volumes to recover from Q4CY12 gradually, as the base turns favourable. Deutsche Securities is not so confident and says Nestle’s ability to outperform market growth is under question, as its execution capabilities have been under a cloud. The market seems unwilling to give it high multiples, given that growth is missing. Deutsche values the stock at 28.5x CY13 earnings, with a target price of Rs 4,100.